If you use employment agencies or employment businesses to recruit new staff or temporary employees your relationships with such companies will undergo significant legal changes from 6 April.

The Government has been consulting for some time on the revision of the law regulating the conduct of employment agencies, which dates back to 1976.The result is the Conduct of Employment Agencies and Employment Businesses Regulations 2003, which come into force this month.

The object of the regulations is partly to increase the protections offered to both employers and temporary workers, but also to try to simplify the existing framework that is the cause of some confusion among employment agencies.

Employment agencies versus employment businesses

The regulations apply to both employment agencies and employment businesses, but the distinction between the two is of fundamental importance. Agencies are recruitment firms that introduce candidates to clients with the idea that the successful candidate will be employed directly by the client, rather than through the agency. Businesses are firms that hire the workers themselves (whether as employees or contractors) and then supply those workers to the client on a temporary basis.

Restrictions on the charging of transfer fees by employment businesses

The regulations restrict the circumstances in which an employment business can charge a transfer fee to a client that subsequently takes on one of the business’s temporary workers. The idea is to balance the legitimate business interests of the firms (that do not want to see their temps poached) against the need to guard against fees operating as a disincentive to the creation of permanent jobs.

What are the restrictions?

There are two possible restrictions that can be imposed.

The extended supply restriction: in this case, the business can charge a transfer fee only if it offers the client a choice between either (a) paying the fee, or (b) continuing to have the worker supplied by the business for an extended period, after which the worker transfers without charge.

The time restriction: the fee can be charged here only if the worker transfers within a set period of time, either,

14 weeks after the start of the first assignment; or

eight weeks after the end of the assignment, whichever period ends later.

When do the restrictions apply?

Which of these restrictions applies depends on whether the worker has been supplied to the client, or only introduced to the client; and also on whether the workers’ subsequent transfer is:

a temp-perm transfer (ie the worker is employed directly by the client)

a temp-temp transfer (ie the worker is supplied by another employment business to the same client)

a temp-third-party transfer (ie the worker is introduced by the client to a third party and then employed by that third party) (see table below).

General obligations

The regulations impose the following obligations on agencies and businesses:

Charging for additional services: the old regulations prohibited firms from charging work-seekers a fee for finding them work, but the prohibition did not apply to additional services (eg CV writing, training, providing personal protective equipment).

Some firms got round the prohibition against charges by making the provision of work-finding services conditional on these ancillary services being purchased.The new regulations close this loophole by prohibiting these conditional agreements and requiring the firm to provide detailed information about exactly which services are being charged for and how.

Imposing restrictive terms: both agencies and businesses are prevented from including restrictive terms in their contracts that might impose barriers to labour mobility.For example, a firm cannot include a term in a worker’s contract that imposes a detriment on that worker (for example, withholding wages) for terminating the contract with the firm and taking up employment either directly with the client, or with a competing business.This does not mean, however, that the worker cannot be required to give a reasonable period of notice.The prohibition also does not apply if the firm is a business that is the actual legal employer of the worker.

Acting in only one capacity: when introducing or supplying a worker, firms must be clear about the capacity in which they act. They cannot, for example, hold themselves out as an agency to the worker while at the same time advising the client that they are operating as a business. This does not mean that a firm cannot act, in general, as both an agency and a business in respect of the same worker or the same client; but it cannot do so in relation to a particular assignment or placement.

Acting as agent: businesses are prohibited from concluding contracts on behalf of either work-seeker or client, while agencies can only do that in certain narrow circumstances.

Agreeing terms in writing: the regulations impose obligations on both agencies and businesses to record in writing the terms of the agreements they reach with both work-seekers, on the one hand, and clients on the other.They also set out a list of specified items that must be agreed and recorded in writing.In client agreements, this includes information on whether the firm is acting as an agency or a business, details of the fee being charged and the procedure to be followed if a business supplies a work-seeker who is not satisfactory.

Pre-engagement vetting: before introducing or supplying a work-seeker to a client, an agency or business is obliged to carry out a series of pre-employment checks on both the client and the work-seeker with the aim of ensuring both that there is a match between worker and client, and also that both parties understand clearly the terms of the engagement.

So, for example, the firm must check the suitability of the worker in terms of the individual’s qualifications, training and experience, but it must equally gather information about the health and safety of the client’s working environment.

There are additional vetting obligations where the position involves working with children or vulnerable adults.The firm is also obliged to pass on to the worker, in writing, information gleaned about the client, and vice versa.In the case of businesses, they must also inform the client of the basis on which they have engaged the worker (ie as an employee, an apprentice or a contractor).

Post-engagement obligations: in addition, if an employment business subsequently discovers that a worker it has supplied to a client is unsuitable, it is obliged to tell the client “without delay” and to terminate the engagement.An agency is under the same obligation to inform the client if it discovers a recruit’s unsuitability within three months of introducing the person to the client.

What about confidentiality and data protection?Under the confidentiality provisions in the Regulations, a firm cannot disclose any information relating to a work-seeker without that person’s prior consent, unless it is for the purpose of “providing work-finding services to that work-seeker”. But once the person has been found work, the firm is obliged to notify the client “without delay” if it finds out that a worker is unsuitable.

These two requirements appear to be in direct conflict.We will have to wait for the courts to decide how this conflict is resolved, but in the meanwhile, firms should seek professional advice if they are faced with this Catch-22.

In addition, from a data protection perspective, it would be advisable to copy to the worker any information given to the client, so that the worker has an opportunity to challenge any inaccuracies in the information.

Advertising: all firms are obliged to indicate in their advertisements whether they are acting as agencies or as businesses and are prohibited from placing advertisements unless they have information about all the positions being advertised and the authority of the client to find work-seekers for each position advertised.

Additional obligations

In addition to the general obligations that apply to both:

businesses are prohibited from supplying temps as scab labour in strikes and deducting from workers’ payments in certain circumstances (including, for example, because the firm has not been paid by the client, or because the worker has not produced a signed timesheet)

agencies are prohibited from paying work-seekers on behalf of the client.This is to prevent confusion for the worker as to who the legal employer is.

What about if the work-seeker is a company? The restrictions and obligations contained in the Regulations apply equally if the work-seeker is incorporated. In other words, individuals supplying their labour to an agency or business through service companies will still be entitled to the protections contained in the Regulations.

An agency will, however, be able to charge the incorporated work-seeker a fee instead of the hirer.It is possible for the service company to opt out of the Regulations (as long as the individual consents), but the agency or business cannot make the provision of services conditional on the company signing an opt-out.These provisions are only in force from 6 July 2004.

Note that there are special rules applicable to artists’ agents (ie firms acting for actors, film directors, models, professional sportspeople and so on).

Penalties for failure to comply with the regulations

If an agency or business has not complied with the regulations:

it can be sued for damages by anyone who suffers loss or injury as a result of that failure

the DTI can initiate a criminal prosecution against it (the maximum penalty is a fine of up to £5,000)

any contractual term that contravenes the Regulations is unenforceable (though the remainder of the contract may still be enforceable).

This is in addition to the DTI’s power to apply to an employment tribunal to have someone declared unsuitable to carry on, or be concerned with, an employment agency or business.